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Dan Wang is a technology analyst at Gavekal Dragonomics, a macro research firm, where he focuses on Chinese technology and industrial policy, global supply chains, and U.S. regulatory actions. Wang studied philosophy at the University of Rochester and previously worked in Silicon Valley. He is based in Shanghai and is also a contributor to Bloomberg Opinion. He writes about technology, history and literature on his personal site, danwang.co. He was recently a guest on the Sinica podcast. What follows is a lightly edited interview.

Q: The last year of the Trump administration saw a U.S. campaign against China’s semiconductor industry — both semiconductor makers like SMIC and HiSilicon as well as end users. What is the state of China’s semiconductor industry today?

A: China has figured out the basics of most parts of semiconductor technologies, but it is not leading in any of them. So, in the most generous cut, Chinese manufacturing is around five years behind the market leader. That is to say, SMIC [China’s leading semiconductor firm] is around five years behind TSMC [the world’s leading semiconductor manufacturer, based in Taiwan]. China has relatively good design capabilities, especially from HiSilicon, which is able to design very sophisticated chips that power smartphones. And there are some other ways in which Chinese design is getting pretty good. But this is relatively simpler than the manufacturing, which is much more capital intensive, and requires billions of dollars of equipment, as well as a considerable amount of manufacturing process knowledge that Chinese firms haven’t really been able to accumulate. 

Now, China’s greatest weakness in terms of its semiconductor supply chain is that it lacks a lot of the equipment to actually manufacture semiconductors, as well as the software design tools to be able to design semiconductors. For the most part, the equipment is an American affair, with some representation in Japan, as well as in Europe. And then the software design tools, namely, electronic design automation (EDA) tools are almost entirely an American product. So China’s semiconductor industry has never really been able to catch up, even when, for the most part, it had access to the leading tools on the market. Today, the semiconductor industry is facing some pretty tough challenges, after quite a number of Chinese companies ended up on various [U.S.] export control blacklists. In the worst case, the semiconductor manufacturers will have to wait for the rest of the ecosystem to catch up in order to be able to manufacture products at all. And it’s very difficult to see how, in that environment, Chinese companies can be leaders within a short to medium timespan.

Do you think in the long term, Chinese semiconductor companies will be able to catch up to the cutting edge?

In the longer term, I’m more constructive about China’s semiconductor efforts. That’s mostly due to various technology and market facts. There’s an emerging consensus now that semiconductors are, in some ways, mature, and that semiconductor technology is a mature technology. There are fewer and fewer companies making cutting-edge products. The biggest driver for the most cutting-edge chips has been mostly Apple’s iPhone. And we know now that smartphones as a whole, globally, have been a contracting market for the last four years. There will be some companies that make use of ever more sophisticated chips. But it has become so expensive to start up new semiconductor fabs. Moore’s Law is also an economic law.¹Moore’s Law is an observation often used to understand the growth of the semiconductor industry. It finds that the number of transistors on the most advanced chip has doubled every two years over the past decades. But as transistors have become microscopic — today’s cutting edge chips have transistors that are 5 billionths of a meter — continuing this rate of growth is an increasingly difficult challenge. It’s becoming a little bit more challenging to see how many use cases there will be for ever more sophisticated technology. 

The other broad trend favoring China is that if we believe all of the 5G hype, [that for example] there will be semiconductors in traffic lights, there will be semiconductors in our pens, there will be semiconductors in the coffee that I’m drinking, a lot of these are not necessarily very advanced chips. You don’t need an iPhone-level processor in a traffic light; pretty lagging-edge technology will do just fine. And China is, for the most part, capable of producing a lot of these different things. It also bears mentioning that the Chinese government is putting a huge amount of effort into figuring out semiconductors. I’m very struck that at the conclusion of 2020, the Central Economic Work Conference in Beijing, designated science and technology as the top priority item for economic work in 2021. As far as I can tell, that has never been broken out independently in the past, and to have this listed as the top priority driven in part by the Chinese government’s awareness of its weaknesses in various advanced technologies, including semiconductors, that is a pretty powerful statement that the country really wants to figure out these different technologies.

The U.S. is trying to stop China from being able to buy or make the most advanced semiconductors — the five nanometer chips. What does that mean for China?

In a macro sense, in the short to medium run, it will devastate particular companies, but it won’t destroy the entire electronics industry. A pretty critical difference for China now is that a lot of Chinese companies who are users of semi-conductors have developed advanced capabilities. Twenty years ago, China was already a producer of electronics. But a lot of that consisted of Taiwanese PC makers, which were merely doing assembly in China, and they could not be bothered to buy obviously inferior Chinese chips. But now when you have Chinese smartphone makers capturing around 40 percent of the global smartphone market, when you have a leading PC maker in China, namely Lenovo, when all sorts of electronics from electric vehicles to refrigerators and microwaves are being produced very significantly now by Chinese companies that can be convinced or compelled to buy Chinese semiconductors, that’s a much better market than in the past when there were not so many sophisticated firms willing to be customers for Chinese semiconductors.

China often announces ambitious industrial policies. How big a role do they play in driving the direction of China’s growth?

The U.S. government has removed the political room for China’s leading companies to resist buying domestic. They’re used to buying the best components on the market, which is mostly American. Today, they’re shifting their procurement to European, Asian, and domestic vendors. This will make a big difference. A lot of Chinese firms are now very intent on cultivating reliable supply chains. So, in my view, the U.S. government is putting a company like Huawei in the position that NASA was in the 1960s. NASA (and the U.S. Air Force) more or less created the semiconductor industry, mostly by buying semiconductors on the basis of performance, not on cost. Huawei is another cash-rich, technologically capable firm that is trying very hard to save itself as a result of U.S. actions. And that should raise the broad capabilities of the Chinese technology ecosystem.

So, I think that industrial plans in China have become much less relevant on the margin. U.S. actions have focused a lot of minds on semiconductor technologies. I find it pretty astonishing to see people on the train watching Douyin [the TikTok equivalent for the Chinese market] videos on what a semiconductor is and what China’s place in the semiconductor value chain is. To me, the next big Chinese government-led initiative is not as important as what the private firms are doing because the U.S. government has really made it critical for companies to cultivate Chinese technology ecosystems.

Amid the trade war, many foreign companies expressed a desire to move manufacturing and supply chains out of China. How has that gone so far?

There certainly are a few companies that have left China. But it has not been a very substantial flow abroad to countries like Vietnam or India or Mexico to say nothing of the United States. That’s due to two broad reasons. The first is that China is still a huge and growing market that businesses want access to. When I talk to multinationals in China, a lot of their corporate planning reveals that China is still a great growth story for a lot of particular firms, and not just in 2020, when China was the only growing major economy. Companies tell me that when they take a look at the numbers over the next ten years, they still expect China to be a considerably larger market than India or Southeast Asia or Africa. Why should they leave what is still the world’s best growth story?

The other major reason is that China is still a very good producer for many different types of products. China is a huge manufacturer now, not necessarily of the highest end goods like pharmaceuticals or semiconductors or wide body aircraft. But outside this select group of big ticket items, China is producing very credibly a lot of different types of goods from light goods to consumer electronics. Companies tell me there is a wide and deep pool of labor in China that they can’t access anywhere else. The U.S. has very significantly de-industrialized, it has lost a lot of manufacturing workers, and that has just triggered a whole lot of cascading skill loss in which you don’t have communities of engineering practice in place anymore to build pretty sophisticated products. And that’s a difficult trend to reverse. China has excellent infrastructure. It has highly credible policy support. The local governments as well as the central government really made a big effort to try to help manufacturers get online during the early months of the pandemic. 

And also, very significantly, the current supply chain is the one that we have. Most manufacturers are embedded in these networks of production, in which it is pretty difficult to extract yourself out of this network if the rest of the supply chain doesn’t move simultaneously. So if a manufacturer moves to, for example, Vietnam, which is fairly close to China, they still need to get all of their products shipped from China. That lengthens a lot of their lead time such that it becomes quite a lot more difficult to have efficient production because you’ve just added, for example, more delays to the process. Now, to reiterate, there certainly are some companies that have left China. They don’t necessarily see great market opportunities or labor is too expensive, and there are always headlines on this trend. But as far as we can tell, the data does not indicate that there has been an exodus of manufacturing. And when I spend time speaking to multinationals, which is a considerable part of my work, more often than not they’re telling me that they’re expanding their Chinese production.

China initially responded to Covid-19 by shutting down much of the country, including production. But it quickly let manufacturers come back online. How did they adapt?

Seeing China’s response in terms of manufacturing this year has been highly impressive. The State Council put out a figure that China exported around 220 billion masks in, which is about 40 masks per person [in the world]. In the early days, China also ramped up production of different types of personal protective equipment (PPE) as well as ventilators. What we saw in China was a whole-of-society response, coordinated by the government, but in which private firms also stepped up to have a major role in producing enough to get through the pandemic.

One of the things that I was struck by was when a manufacturer in China told me that U.S. firms didn’t move fast enough. So often, they [U.S. firms] had to ask if making masks is part of their core competence. The Chinese companies decided that making money is their core competence, therefore, they should go make masks and PPE and other things. What we saw this year was a very dynamic effort by manufacturers. The U.S. and other Western countries, for the most part, spent quite a bit of federal money to support consumers and support households to get through the pandemic. By contrast, in China, the government gave pretty minimal support to households and instead spent quite a bit of effort to try to get production back online. So this is a way in which China and the U.S. look pretty substantially different in terms of China being much more friendly towards producers.

The Chinese companies decided that making money is their core competence, therefore, they should go make masks and PPE and other things.

In the wake of a campaign of sanctions and export controls from the Trump administration, Chinese companies are looking to de-Americanize their supply chains. How is that going?

It is a very slow process, and the will is not present in every business. But it is very much worth noting that the U.S. government has made many U.S. manufacturers into less credible suppliers for some of China’s largest companies by designating a lot of Chinese companies to poorly understood blacklists managed by the Department of Commerce or Treasury. A stroke of a pen can devastate their supply chains. Chinese firms are now much less eager to depend on American supply. The logic there is pretty clear.

The fallout will take some time for the U.S. government to really see. But every time the U.S. Department of Commerce takes any negative action against Huawei, there’s a lot of coverage in Chinese domestic media. These actions are highly complex, which even the top sanctions lawyers in the world struggle to understand. That creates the room for quite a lot of exaggeration or misinformation in China on what exactly these rules constitute. And I’m hearing now of increasing instances of Chinese companies just wondering if they can still trust American products. My favorite example is a report by The Economist that chicken farmers that import select breeds from the U.S. are wondering if their poultry supply chain will be devastated by the United States. There are some high-quality cardboard manufacturers that depend on U.S. supply who are not sure if they can depend on it going forward. These are not exactly high technology industries that Chinese firms are trying to diversify away from.

One way China has tried to reduce dependence on foreign goods is through industrial policy. What do you make of Chinese industrial policy, and how do you understand the Made in China 2025 initiative?

The problem with Chinese industrial policy has been that it used to be mostly a state-led affair, in which the government requires various ministries, as well as state-owned enterprises, to buy obviously inferior Chinese technologies. The record of Chinese industrial policy, I would say generously, is one of mixed success. There are a few success areas — solar panels and high-speed rail — in which companies really were able to advance their capabilities from mostly government-led procurement. But if you take a look at bigger ticket items like aviation or semiconductors, those are clear instances of failure, or at least not catching up. 

As for Made in China 2025, I would situate it, first of all, in a long history of Chinese industrial planning, from the first five year plan that the government created in 1953, to various discrete technology plans that include the 863 Program.²The 863 Program was an industrial plan started in March 1986 to support the domestic production of advanced technologies. Made in China 2025 has been the latest iteration, which has had extraordinarily precise goals of self-sufficiency targets in highly discrete technologies, in a way that was even criticized at the time within China for returning to basically state-led innovation that has set these ambitious targets that, for the most part, it will not meet. In my view, Made in China 2025 targets should be taken seriously but not literally. The Chinese government is trying to deflect criticism by saying that a lot of these very precise targets were the enthusiastic creation of a few academics and bureaucrats, and they’re not exactly binding. 

Meanwhile, the Made in China 2025 plan has become much less relevant in the last few years because of the American reaction. Namely, the U.S. government has aligned the interests of private firms with the state’s interests of self-sufficiency as well as technological greatness. By targeting China’s technology leaders, including Tencent, ByteDance, and Huawei — in my view China’s most important technology company — the U.S. government is aligning these private firms’ interests with the interests of the Chinese state to pursue self-sufficiency as well as technological greatness. And so, to me, the next big Chinese government led initiative is not as important as what the private firms are doing because the U.S. government has really made it critical for them to cultivate Chinese technology ecosystems.

According to a survey from AmCham Shanghai, 60 percent of multinationals in China were optimistic about their future. Amidst all of this tension, why are foreign companies so optimistic about their future in China?

Well, for the most part, multinationals in China are still making a great deal of money. When they compare China with other markets in 2020, for many, the country was the only area of major growth. I’ve heard that for certain big American companies, China was responsible for close to the totality of the group company’s profits in 2020. One of the dogs that didn’t bark in this year was that Beijing did not broadly retaliate against American firms. Instead, for the most part, although it sent a few scary signals, Beijing has been pretty friendly towards foreign firms. I think that shows that China very much needs foreign firms to be in China, not only because foreign firms provide a great deal of technology, but also because foreign firms, such as Apple, General Motors, Starbucks, are major employers in China. We see not only that China needs foreign firms, but also that China has embraced a more subtle form of what retaliation really means. So instead of hurting a major company like Apple in the way that the U.S. has hurt Huawei, the Chinese government seems to have decided that it’s better to hug these companies even closer. It knows that hardliners in the [Trump] White House would have liked nothing better for all American companies to uproot their supply chains and move away. But instead, the Chinese government has decided to hug them closer, to be more friendly towards them, and then to provide a better business environment.

For the most part, although it sent a few scary signals, Beijing has been pretty friendly towards foreign firms.

You mentioned that you see Huawei as one of the most important companies in China. Will it be able to survive U.S. sanctions?

Without some technology or relief from the Biden administration, I expect Huawei will have a very hard time. We know that Huawei’s smartphone business is tanking, mostly because it cannot procure enough inventory to be able to produce hundreds of millions of smartphones. And that has made up over half of its revenue in its latest annual report. Its carrier business is in slightly better shape. It might continue shipping the 5G base stations, at least for all of 2021 and perhaps a little bit longer. And it is doing okay and its third major business segment — enterprise sales — but that makes up only a small share, about 10 percent, of Huawei’s revenue.

Now, Huawei has indicated that it is becoming much more of an automotive company. It is pivoting much more towards automotives, making not just an infotainment system inside a car, but also building power trains. Huawei will certainly survive in some form, but a Huawei that isn’t really selling smartphones and isn’t really selling 5G base stations is not the Huawei we used to know.

Earlier, you mentioned that the U.S. has de-industrialized. Is China moving in this direction as well?

President Xi declared in April that digitization is good and very important, China must never deindustrialize or lose various segments of manufacturing. And I think that’s driven by a few things that the Chinese leadership has observed. First of all, in spite of a lot of triumphalist statements that China is now a great technology leader because it has various consumer internet giants and high speed rail, the Chinese leadership received a rude shock when it saw that ZTE, as well as Huawei, suffered quite a lot from U.S. actions, in that these companies lacked access to advanced technologies, especially semiconductors. I think the Chinese leadership has realized that manufacturing these things is very important. 

China’s leadership has now signaled its distrust of consumer internet through antitrust investigations into various internet platforms, especially Alibaba. It’s saying that let’s not regard consumer internet as a particularly high form of technology in the way that the U.S. worships Silicon Valley. So, China signaled that these various high prestige areas in the West, especially the internet, as well as finance and property, are not going to receive the same level of prestige in China. China is much more of a manufacturing economy. And so, China has become much more supportive of manufacturing, for the traditional reasons that it creates a lot of skills, it creates a lot of jobs, and the industry is upstream of a lot of different types of the consumer internet and digital technologies. I think the Chinese leadership is committed to this idea that manufacturing is important in a way that I don’t see the United Kingdom or the United States are still committed to manufacturing work.

Is there anything that stands out that people tend to get wrong when thinking about U.S.-China technology disputes?

In my view, China’s technology capabilities were not very strong at all when the U.S. Trade Representative released its Section 301 Report. A lot of Chinese leaders were guilty of believing their own hype that China was a major technology leader simply because it has a very large market for consumers to buy goods online or exchange messages online. A large pool of consumers does not make China a technology leader, even though Tencent and Alibaba can rightly regard their Silicon Valley counterparts as the only peers in the world. But, at this point, the Chinese leadership has realized that its technological capabilities have not been quite so strong and they really need to catch these weaknesses up. So, what was not true in the past is now more true, mostly as a result of U.S. government actions which have demonstrated how much more powerful the U.S. technology ecosystem is.

You have written that today, there is less ambition for technological innovation than in the past. If people want to think big about technological innovation, where could that take us?

In the early ‘60s, the U.S. did a lot of research and development and planning of an effort called Project Orion, which was a way to send a rocket ship to the planet Saturn by exploding a whole series of atomic bombs behind it as the means for propulsion. And those were the grand projects of the 1960s that aren’t well pursued today. One of the things I’m highly struck by is that we are pretty sure that there are warm oceans under the moons of Jupiter and certain moons of Saturn, and I think it’s crazy that we haven’t made more of an effort to explore for life within our very own solar system. A moon of Jupiter is not really that far away relative to the rest of the galaxies, and these were the things that were bigger projects a few decades ago. I am also very keen for us to recover our idea of missions of the future instead of us having everyone play games on their mobile phones and making a lot of payments on their smartphones and then declaring that is the best that progress can be.

Are there any books, either fiction or nonfiction, that you think can help us better understand this moment or the topics we’ve discussed today?

The books I’m always keen to promote, on China at least, are first: How Asia Works by Joe Studwell, which tracks the broader history of industrialization in Asia; China’s Economy: What Everyone Needs to Know, by Arthur Kroeber,³Disclosure from Wang, the head of research at Wang’s firm. which explains the mechanisms of China’s economy; and Knowing China by Frank Pieke, which is a very short, nice intro to China’s ideological commitments.

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